Latest jobs report: Even worse than it seems

According to employment statistics released Friday, the unemployment rate dropped slightly in April. Given the circumstances, though, this was not greeted as good news.

According to the Bureau of Labor Statistics, the unemployment rate dropped to 8.1 percent in April. This was the second consecutive monthly decline, and brought the unemployment rate down to its lowest level since January 2009. A year earlier, the unemployment rate was 9.0 percent, and at the end of last year it was 8.5 percent. In that context, one might think that an 8.1 percent unemployment rate represents progress.

So what's the catch?

Troubling job trends

There are two problems with recent employment figures.

One problem is that the pace of job creation is slowing. The number of new jobs has fallen from 259,000 in February to 154,000 in March to 115,000 in April. These figures reveal not only a weak level of job growth, but also a troubling direction for the months ahead.

The second problem is a little less obvious, but it helps explain why the drop in the unemployment rate is less of a positive development than meets the eye. The unemployment rate is a function of how many people are looking for work, compared to the total number of people participating in the labor force. What taints the redution in the unemployment rate a little is that an increasing portion of the adult population is no longer participating in the labor force.

In April, the labor participation rate fell to 63.6 percent, the lowest in more than 30 years. Some chalk this up to the hopelessness of the recent job market, but this figure has been declining since the year 2000. That may be an indication of when the economy first began to decline, or it may be a function of an aging baby boomer generation. Whatever the cause, though, a declining labor force is not conducive to strong economic growth.

Employment and savings account rates

Employment is a key economic indicator, but it has particular significance to the current low interest rate environment. For one thing, lowering the unemployment rate is one of the primary goals of the Federal Reserve's low interest rate policy. As long as unemployment remains high, the Fed is likely to continue encouraging extremely low interest rates.

Also, employment growth is an indicator of business optimism. When companies are hiring, it means managers are optimistic and looking to expand. This same optimism creates loan demand, which is a key ingredient to getting banks to offer higher savings account rates. When the loan business is sluggish, banks simply don't have as much incentive to attract deposits. When banks can make a healthy profit by loaning out money, they are more likely to offer higher deposit rates to attract deposits that they can use for lending.

This is why a falling unemployment rate is more bad news for savings account interest rates. There needs to be strong growth in the underlying number of jobs -- not just an easing of the unemployment rate -- to signal the type of growth environment that would fuel loan demand. In that context, the slowing pace of job creation over the last two months represents yet another obstacle to the nation's savers.

Stocks

Top Stories

U.S. stocks declined on Tuesday in a retreat from the previous session's sharp rally, but major indexes remained on track for first-quarter gains and the S&P 500 was set for its ninth straight quarterly rise.